Hello everyone Happy 4th,
I see a lot of advice on how to analyze a deal, how to close a deal and a lot of other amazing advice. But there are some steps that need to be taken before you even begin to analyze that property. I believe that this is where a lot of us new investors get stomped because know that we have an idea on how to invest, we go out looking at all of these properties but we really have no idea where to look. So I guess my question is what are some simple techniques that are being used to evaluate a potential market and submarket? what websites are you using? who are you calling? what kind of questions did you ask when you called? etc etc etc
Thank you in advance to all who reply. Your answers and help is truly appreciated
My simple technique is to do some pro-forma (sample) calculations to know what to target. Pick 3 levels of properties and run the numbers. Find an average $50,000 property, a $100,000 property, and whatever else... maybe a $200,000 property (use numbers for property sizes that interest you / your budget that are for sale in your area)
Next look up the taxes on those properties in your county property appraiser's website.
Next use a simple mortgage calculator (I use google's - search "mortgage calculator") put two spaces in between the words though (bigger pockets won't let me do that in this message interestingly!)... that will help you find the google one, versus the website titled that whose calculator is much more complex.
The only thing you are lacking a that point is an Insurance figure. You can use a generic one for the basis of simplicity, but you can have your local insurance person give you an closer estimate... In my area with hurricane premium included it's about $800 for the cheap property, and about $1,200 for the mid property, and about $1,800 for the expensive property.
With those numbers you can determine your PITI (Principle, Interest, Taxes, and Insurance) expenses - which make up your core mortgage payment.
After that you will want to include some sort of maintenance reserve. We use $100/ property. On the high end you might want to use $150.
So now you have what I call your "all in monthly cost" of your properties.
Next: What can you rent them for? This is pretty easily figured out by going to someplace like zillow rentals, or apartments.com and selecting "houses" and looking at what things are renting for. Pick several houses in each size of the one you targeted and look at what they are getting for rent per square foot. In our area it's like $1 to $1.15/sf. for smaller houses, but it slopes down as you get bigger... so the big house might be a $0.90/sf or something.
Heading for the finish line, you can now take your approximate rental income based on the $/sf figure you just found, and subtract your "all in" expense to determine your pro forma monthly cash flow for the property.
Real quick you will see which type of property performs the best. Secret - It's not the biggest one! But use your numbers as the basis for what properties you want to target. This will quickly let you set filters in Zillow, or wherever you search for listings to only target the ones that will perform best for you. If you find out $50,000 houses rock, you can ignore all the $100,000 listings you see, thus making you much more efficient at searching for deals... but keep in mind you can always offer less on properties, so I wouldn't set it straight up at $50k if that was what you were targeting.
All the best!
@Randall Alan wow, I have yet to see anyone be as concise as you are without losing too many important details. Your reply gives a great overview of your style of investing and is very helpful to me as I am also just starting out on my real estate journey!
@Randall Alan hello Alan any thoughts on market entry. I would also like to to look at new markets for a second rental as cost are high in nyc. The thing I have down I have is to use the census and look at population changes for counties or Google vague searches such as the job growth by states do you have any thoughts on how to narrow down a new market.
You guys should check out www.bestplaces.net.
@Samuel Geremew , thanks for the compliment. I just like sharing what has worked for me... it’s systematic... systems let you work smarter and focus your efforts. I can simplify my results even more for you... what works best for me is any property I can buy at under $75,000 that rents for over $1,000 a month. The better either number, the more profit I make... but for me that is my target property. I also am also looking for a 2/1 or bigger... with a 3/2 being optimal. I’m not a huge fan of 1/1’s.. the 2/1 and larger fits far more scenarios.
@Arif Ahmed , if you are asking about locations, we self manage all our properties... so we only invest in our local area... so I’m probably not the best one to ask as to different regions. My gut says the suburbs to bigger cities where you aren’t paying a premium for location.
Here is a link to an index of median housing costs across the United States.
From a purely “making your money go furthest”, where it costs the least to buy your properties, any money in hand would go the furthest.
With that said, rents should typically be in line with housing expenses overall.. which is to say, in a normally operating market you have to be able rent a house for more than it costs to own it, so you would hope to be able to invest in a nearby town, even if in NYC, etc. You just have to look for the values, work with wholesalers, and under all the other “rocks”... I’ve found properties off Craigslist, for instance, etc.
We take the stance that by avoiding property management costs we maximize our profits as long as we don’t hit our internal limits of ability to manage... so by investing locally it lets us accomplish those goals.
Hope it helps!
Once you find a property you can check out city-data.com and see what the median income is in the neighborhood where the property is located. Even if you find a property where the numbers make sense and it cashflows, it can be in a tough area where median income is below 40k. Aside from that the website has other great information, like crime rate.
@Randall Alan Hey man my apologies for replying so late but that is some amazing information and I really appreciate it. You honestly broke that down for anyone to understand or maybe real estate is that simple but I'm making it hard. I would like to know what is your process before you even begin running the numbers? Like how did you know that was the neighborhood you wanted to look for rentals in?
@Luis Vaca Yes I've looked into city-data and they give a lot of good information, definitely a good tool to have when deciding. That is also a good point about the good cash flow but in low C or D neighborhood
I took my 40 properties I purchased In my area and looked to see which yielded the highest NOI. My takeaway was that properties purchased for $75k or less yielded me the best NOI when they generated at least $1,000. It may not be "that simple" per se, but ultimately it is really just several formulas working in concert with each other... $/sqft is pretty consistent in an area usually... likewise insurance rates, and of course all the PITI figures are pretty static... so it's nothing you can't run for wherever you are at. The $75k purchase /$1000 rent is just what works for me. If $75k units aren't available in your area you just crunch the numbers for what the price points and rent levels ($/sqft) are for your area and you will quickly be able to determine what properties generate the best return for your area. The key takeaway is that you then just target those deals. What I figured out is that buying a $200,000 house yielded no more profit for me than a $75,000 property... so why would I spend 2.5 times the down payment if it didn't yield any better NOI? It's just trying to make the smartest use of your money.
It does mean that a lot of my units are more B- / C level properties... so we are typically dealing with somewhat older properties... not 2000’s properties, but more like 1950’s - 1980’s properties. So you have to decide if you want to play in that part of the market. If not, you may want to spend more to be in a different market segment, but I might suggest you won’t make much (if any) more profit on the nicer unit... but you will be dealing with a slightly nicer caliber of renter... more white collar versus blue collar.
As for process... it really starts with the numbers. I’ll look anywhere in my local market. My first (internal) question is- “how far off of $75k/door is it?” The further off it is, the higher the rent has to be to justify it. So if it were a $90k property, I would want (need) it to generate more than my target $1,000 a month in rent... so maybe $1,100 to $1,200. What will drive that price increase? Bigger square footages, or more bedrooms, or a pool, etc... in short- better amenities... maybe a refinished kitchen with a nice appliance package or refinished bathrooms. So it’s not just $75k homes... it’s just that $75k is my known waypoint / reference case that I compare everything against.
the price point It also factors out to a dollars per square foot price as well. in my area a typical A class property sells for about $115-$125/sqft. I’m typically buying between $65-80/sqft... and sometimes less. So, once the numbers make sense (ie. The property fits those parameters for income and price point)... then I can start to look at the actual property itself... up until this point I’m literally just scanning columns for either $/sqft, or sales price versus sqft... knowing that I need at least about 900-1000 sqft to justify my $1,000 in monthly rent. So I’m not looking at individual listings usually... more like the list view in Redfin, sorted by price or $/sqft.
Then I start looking at the actual property and asking questions like:
Would someone want to live here? That covers things like ... it’s right beside a train track.... it’s 10 feet from a busy road and is noisy as hell inside, or maybe it’s so trashed inside that you just say this is a D level or below property or area.
Is the layout functional, or is it messed up... like 8x8 foot bedrooms,, bizarre layouts, messed up construction where things slope that shouldn’t, etc that you just say, “this property just doesn’t function well” how it’s laid out. So while I can tolerate a lot, I want the property to work for it’s intended purpose, and not be some white elephant just to get a low price point.
My objective is to buy near-turnkey properties. Maybe it needs some paint, an appliance, or new flooring, or to be tented for termites... but typically I don’t want to have to spend more than $3,000 to $5,000 to be able to start renting it, and ideally I want to be able to rent it in a few weeks. The best scenario is that it already has a renter in it at a descent rental rate. So no 60 day renovations. It’s a rental, not a flip! If it needs more overhauling the price I’m paying should reflect it... so if it needed a $10,000 roof, I’m going to want to be at $60-$65k Purchase price instead of $75k, because I want to be at about that $75k per door figure when it’s ready to rent. So as I assess the inside of a property I’m running an internal calculator as to how much It is it going to cost to get it where I need it... and that is going to drive my offer price.
It’s sort of a heartless process... I go at properties wanting them, but not caring if I get them... which is to say that I know in can find properties at my price point I want to buy them at, so I’m going to buy the ones that work / fit my profile, and if I can’t get my price point then it just wasn’t my day to buy that property. We usually get about 80-90% of the properties we offer on though.
So that’s a little about my internal process.
@Salvator Lorick you've had some good replies, and since we hold most of what we buy (not sure if that is your plan), I still look for stabliity. By that I mean not been many large businesses leaving an area or housing values dropping. Even if things are declining slowly, that can accelerate and it would be terrible to hold a depreciating asset that could not be rented or even sold at a loss. Yes, I like current cash flow that makes sense, but I also want strong history for indication of persisting performance.
A lot of good information in this thread. I'll add a few quick thoughts:
- Population growth (and projected population growth going forward) is a good way to get an idea on the basic direction of a metro area. It will quickly become apparent if the city is growing (such as Denver, Austin, Jacksonville, etc.) or shrinking (small towns, many cities in the midwest and rust belt). While you can find good cash flow in cities that aren't growing, it is unlikely your property will appreciate and it may even lose value or become harder to rent, which is a risk that should be considered. It is sometime hard to work with, but the US Census provides this data.
- Regarding submarkets, I think this type of stuff is best explored via relationships with realtors, other investors and local residents. I recently narrowed down my search from the entire NYC metro area to a specific area (Hudson County, NJ) and did so after extensive conversations with a number of people from all facets of the industry. A good place to start would be a Real Estate Investing Facebook group for an area you are considering.
Research is very important before diving into something so that you wont end up regretting.
@Randall Alan Thank you for sharing! It was super useful to see how you decided what was important for you in each step for this process of elimination.